High Oil GOOD

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High Oil GOOD

  1. 1. MGW 2010 High Oil Good Grove/Petit Lab High Oil GOOD High Oil GOOD..............................................................................................................................................................1 ***Uniqueness***..........................................................................................................................................................2 Oil futures down..............................................................................................................................................................3 Oil prices down (1).........................................................................................................................................................4 Oil prices down (2).........................................................................................................................................................5 Oil Prices down – no increase coming............................................................................................................................6 ***Instability links***....................................................................................................................................................7 ME instability key high price..........................................................................................................................................8 ***Russia***..................................................................................................................................................................9 2nc Russia.....................................................................................................................................................................10 2nc impact calc (1)........................................................................................................................................................11 2nc impact calc (2)........................................................................................................................................................12 High prices key (1)........................................................................................................................................................13 High prices key (2)........................................................................................................................................................14 A2 prices will return to high levels...............................................................................................................................15 A2 oil is small share of GDP........................................................................................................................................16 A2 oil funds chechnya war............................................................................................................................................17 A2 russian expansionism bad (1)..................................................................................................................................18 A2 russian expansionism bad (2)..................................................................................................................................19 ***A2 high oil bad***..................................................................................................................................................21 A2 oil shocks.................................................................................................................................................................22 A2 shocks crush US economy......................................................................................................................................23 A2 shocks – predictions wrong.....................................................................................................................................24 A2 shocks – self correcting...........................................................................................................................................25 A2 shocks – storage solves...........................................................................................................................................26 A2 global economy.......................................................................................................................................................27 A2 economic collapse...................................................................................................................................................28 A2 economy..................................................................................................................................................................29 A2 dollar.......................................................................................................................................................................30 A2 consumer spending..................................................................................................................................................31 A2 inflation...................................................................................................................................................................32 A2 productivity.............................................................................................................................................................33 A2 russian reforms / dutch disease...............................................................................................................................34 1
  2. 2. MGW 2010 High Oil Good Grove/Petit Lab ***Uniqueness*** 2
  3. 3. MGW 2010 High Oil Good Grove/Petit Lab Oil futures down oil future is down; consumer feelings and china fears Assis 6-29 2010 (Claudia; MarketWatch; “Oil ends 3% lower, nat gas prices tank 3.9%”; June 29, 2010, 2:41 p.m. EDT; http://www.marketwatch.com/story/oil-ends-3-lower-nat-gas-prices-tank-39-2010-06-29 GM) SAN FRANCISCO (MarketWatch) -- Oil futures ended 3% lower on Tuesday, their largest single-day drop since early June, as investors got spooked by falling U.S. consumer sentiment and fears that China's economy may be slowing down. Oil for August delivery lost $2.31, or 3%, to $75.94 a barrel. Natural gas for August delivery retreated 19 cents, or 3.9%, to $4.54 per million British thermal units. oil futures are declining Assis and Lesova 6-23 2010 (Claudia and Polya; MarketWatch; “Oil futures settle lower on supply glut, weaker housing, Fed”; June 23, 2010, 3:16 p.m; http://www.marketwatch.com/story/oil-prices-fall-on-weekly- buildups-in-supplies-2010-06-23?dist=beforebell GM) Oil futures fell nearly 2% Wednesday as reports showing a supply glut and a record low for U.S. housing sales rekindled fears of weak demand for energy products. A Federal Reserve statement about the state of the economy only added to these worries. The Fed kept interest rates intact, as expected, but investors sweated about a downgrade for the economic outlook. "Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," the Fed said. Oil lost about 30 cents in the 15 minutes between the rate announcement and the end of floor trading. Crude oil for August delivery declined $1.50, or 1.9%, to settle at $76.35 a barrel. Natural gas bucked the downward trend for energy products and posted gains of 1%. Oil prices started a deeper descent as the Department of Energy reported on oil and oil products inventories. The DOE's Energy Information Administration said oil inventories increased 2 million barrels in the week ended June 18. Gasoline stocks declined by 800,000, the EIA said. Analysts polled by Platts expected a decline of 1.5 million barrels in crude stocks and a drop of 500,000 barrels in gasoline supplies. 3
  4. 4. MGW 2010 High Oil Good Grove/Petit Lab Oil prices down (1) Oil prices and demand down – china slowing, Europe recessions, and US consumer spending drops make rebound unlikely Shore 6/30 (SANDY SHORE, AP Business Writer – Wed Jun 30 2010 http://news.yahoo.com/s/ap/oil_prices) A.L. Oil prices dropped slightly Wednesday and closed out their first losing quarter since the final three months of 2008.The biggest factor in the decline was concern about the various leaks that sprung in the global economic recovery. Europe's financial crisis, signs of slowing growth in China and eroding consumer confidence in the U.S. all flashed warnings signs about energy demand. BP's oil spill in the Gulf has little impact on prices.Oil dropped 9.7 percent from the end of the first quarter, when it traded at $83.76. As a result, drivers got a pleasant surprise: gasoline prices fell instead of rising ahead of the busy summer driving season. The average price of a gallon of gas declined to $2.755 from $2.798. Most analysts had expected a run up above $3 by July 4. Gasoline prices were flat Wednesday as cautious consumers weigh a vacation trip against economic worries. Prices rose about 1.4 cents from a week ago and are up 12.2 cents from a year ago, according to Wright Express and Oil Price Information Service. Oil prices low – on the brink of a sustainable low Day 6/30 (Matt Day, Dow Jones Newswires JUNE 30, 2010 http://online.wsj.com/article/BT-CO-20100630-710529.html) NEW YORK (Dow Jones)--Crude oil futures continued to weaken after midday Wednesday, dropping to two-week lows below $75 a barrel as oil products prices fell sharply after U.S. data showed higher-than-expected inventories and weak demand. Light, sweet crude for August delivery was down 73 cents, or 1%, to $75.21 a barrel after trading to a low of $74.39 a barrel, the weakest price since June 14. Prices hasn't settled below $75 a barrel since June 11. August North Sea Brent crude on the ICE futures exchange traded 57 cents lower at $74.90 a barrel. Petroleum products led the decline after a U.S. government report showed gasoline and distillate fuel (diesel/heating oil) were higher than expected in the week. Gasoline stocks, expected by analysts surveyed by Dow Jones to fall, rose by 537,000 barrels for the week ended June 25, the Energy Information Administration reported earlier Wednesday. Stocks of distillate fuel, including heating oil and diesel, rose by 2.457 million barrels, more than double analysts' estimates. "We're teetering on the edge here," said Rich Ilczyszyn, senior market strategist at Lind-Waldock in Chicago. "If we close below $75, I think we're going to establish a trade down to the low $70s" in coming days, he said.Products supplied, a rough measure of demand, fell to two-month lows of 18.961 million barrels a day for the latest week, the EIA reported. Traders said the selloff was intensified by the news that the first shipments of crude oil from Canadian oil sands through TransCanada Corp.'s (TRP) Keystone pipeline arrived in the U.S. Stocks of crude oil, distillates and gasoline all topped their five-year average levels for this time of year, as refiners slowed their operations unexpectedly, lessening demand for crude in the latest week.Ahead of the expiration at the settlement, July petroleum products prices were down sharply. The selloff also hit the August contracts, as well. Front-month July reformulated gasoline blendstock, or RBOB, fell 2.2 cents, or 1.1%, to $2.05 a gallon. July heating oil traded 3.85 cents, or 1.9% lower, at $1.9828 a gallon. Oil prices are declining The News International 6/30 (The News International, http://www.thenews.com.pk/daily_detail.asp? id=247977, June 30, 2010) LONDON: Oil prices fell more than 3 per cent to below $76 per barrel on Tuesday as stock markets tumbled and risk appetite dwindled on renewed worries over eurozone debt and fiscal problems. European shares fell towards a three-week low, Shanghai’s equities index lost more than 4 percent and Japan’s Nikkei was poised for its worst quarter since 2008 as the dollar rose against the euro. Wall Street fell more than 1 percent in early trade. A supportive factor for oil was removed as forecasts indicated Tropical Storm Alex would skirt the main production region in the Gulf of Mexico, limiting disruption there to a few precautionary shutdowns. US crude for August tumbled as much as $2.62 to a low of $75.63 per barrel before recovering to around $75.90 by 1330 GMT, extending Monday’s 0.77 percent decline. ICE Brent fell $2.19 to $75.40. 4
  5. 5. MGW 2010 High Oil Good Grove/Petit Lab Oil prices down (2) Oil prices are going down Yousuf 6/30 (Hibah Yousuf, staff reporter, http://money.cnn.com/2010/06/30/markets/oil/ June 30, 2010) NEW YORK (CNNMoney.com) -- Oil prices continued to slide Wednesday, and posted the first quarterly decline since the fourth quarter of 2008, after a weaker-than-expected report on crude inventories.What prices are doing: Crude oil futures for August delivery fell 31 cents, or 0.4%, to settle at $75.63 a barrel.Over the course of the quarter, oil prices lost 9.7%. Prices have gained every quarter since the last quarter of 2008, when they plunged by 55.7%.The national average price for a gallon of regular unleaded gas held steady at $2.755, unchanged from the previous day's price, according to motorist group AAA.What's moving the market:Investors were disappointed by weekly supply report that showed weak demand for crude oil. The Energy Information Administration said that gasoline stockpiles jumped by 500,000 barrels, surprising analysts who expected them to drop by 400,000 barrels, according to a consensus estimate collected by energy information provider Platts.Distillates, used to make heating oil and diesel, increased by 2.5 million barrels, above the 1.3 million-barrel increase analysts had forecast. Crude inventories fell by 2 million barrels last week. Analysts expected crude supplies to fall by 1.2 million barrels.Oil prices were also pressured by a report from Automatic Data Processing showed that employers added 13,000 jobs in June, but the gain was below forecasts. Economists surveyed by Briefing.com expected payrolls to climb by 61,000 during the month.What analysts are saying: "The main focus for the energy market will switch to the weekly EIA oil inventories report," said Myrto Sokou, analyst at Sucden Financial, in a research note. "Crude oil prices have retreated almost 10% from the end of March, displaying fears for the pace of the economic recovery," Sokou said. "However, the U.S. hurricane season could provide some support to the energy market and hold crude oil prices in the $70-$80 per barrel range in the near term." oil prices down-consumer confidence AP 6-29-10 [http://www.google.com/hostednews/ap/article/ALeqM5i5TtajgUpSm7KY5jf-lCJGHBB- tAD9GL5CRG0 Accessed 6-30-10 KAP] Oil prices plummeted Tuesday as ebbing consumer confidence in the economic recovery set off concerns about gasoline demand for the busy summer season. Benchmark crude oil fell $2.31, or 3 percent, to settle at $75.94 on the New York Mercantile Exchange. Gasoline and other energy prices also retreated. Prices earlier fell in Asia on concerns of an economic slowdown in China. The selling picked up steam in New York after a closely watched measure of consumers' sentiment about the economy had its sharpest decline since February. oil prices down-finances AP 6-30-10 [http://www.google.com/hostednews/ap/article/ALeqM5i5TtajgUpSm7KY5jf-lCJGHBB- tAD9GLQ0F01 KAP] The biggest factor in the decline was concern about the various leaks that sprung in the global economic recovery. Europe's financial crisis, signs of slowing growth in China and eroding consumer confidence in the U.S. all flashed warnings signs about energy demand. BP's oil spill in the Gulf has little impact on prices. Oil dropped 9.7 percent from the end of the first quarter, when it traded at $83.76. As a result, drivers got a pleasant surprise: gasoline prices fell instead of rising ahead of the busy summer driving season. The average price of a gallon of gas declined to $2.755 from $2.798. Most analysts had expected a run up above $3 by July 4. 5
  6. 6. MGW 2010 High Oil Good Grove/Petit Lab Oil Prices down – no increase coming oil prices will not rise – global demand weakening Wachira 2010 [George Wachira is a writer for Business Daily, he is also the director for the Nairobi Peace Initiative; “Oil prices likely to remain stable in 2010 as market forces take primacy”; January 5, 2010; http://www.businessdailyafrica.com/Opinion%20& %20Analysis/-/539548/836524/-/view/printVersion/-/h505x8z/-/index.html; 7/1/2010; K.C.] Several current factors suggest that global oil prices will not rise wildly in the foreseeable future unless a major geopolitical incident upsets oil supply. However, we need to note that oil commodity traders have been known to imagine future upsets which they speculatively use to justify higher oil prices, even when the chances of these upsets occurring are remote. The very recent oil price increase was partly hedged on Iran going into turmoil , which most of us do not believe is likely. The NYMEX and BRENT crude oil speculative markets have also justified the ongoing oil price movements on dollar strength or weakness, oil stocks levels in USA and global economic revival. The current oil prices which have oscillated between $ 70-80 per barrel are likely to remain in this range for some time. In fact if the market was to be purely determined by the market fundamentals of demand and supply, prices should be below $70 knowing that OPEC will doubtlessly intervene if prices go below $60. The real situation is that global oil demand has been weakening especially in OECD countries to the extent of even comfortably accommodating the ongoing OPEC voluntary supply restriction without visible market upsets. When the prices were rising to $140 in July 2008, many countries were already taking corrective measures to reduce demand, and some of these measures are already bearing results. There have been permanent efficiency and conservation measures that have taken place to counter impacts of expensive oil. Some of these actions have been voluntary while others were regulatory. Many consumers moved from large to smaller vehicles, while others voluntarily developed cheaper forms of mobility. The economic downturn that has subsisted since 2008 has further reduced energy and oil intake. Further, the ongoing green efforts to reduce global warming have been based on substitution of mainly oil with greener alternatives and this has shown good results especially in Europe where under Kyoto protocol there has been quantified conversion from petroleum transportation fuels to mainly biofuels. Green efforts as they continue globally will further reduce oil demand. At the same time new oil production is coming up to increase supply at a time when demand is plummeting. Perhaps the biggest new supply will come from the new licenses recently signed with major international oil companies in Iraq with very ambitious production increase targets from current 2.5 million barrels per day (mbpd) projected to 8.0 mbpd in the next five years. Currently Iraq which is a member of OPEC is not participating in the production rationing. Which brings us to the role that is played by the oil commodity markets. When prices were going towards the peak in mid 2008, there were indications that some of speculative habits of the oil commodity markets were not without reproach. There was even talk of introducing controls through regulations to require commodity markets to abide by minimum ethical business practices . Commodity markets are global and no one government may have the machinery to force the markets to comply. However, the key influencing commodity market, the NYMEX, is wholly within the USA jurisdiction. The US government can introduce measures to ensure compliance with a defined code of market practices in commodity markets so as to reduce impacts of unregulated speculation on consumers and economies The oil producing companies, countries and OPEC all have a complicit silent role when the commodity traders push the prices up. They blame the speculative markets for pushing prices up and yet they get the eventual windfall. However, the major oil producing countries and companies have recently come to appreciate that high oil prices can wreck global economies, leaving their investments vulnerable. Of course companies and countries investing in new difficulty and expensive producing areas will want to have high prices to support and justify such investments. However it is generally accepted that prices between US$ 60-70 will justify most of the new difficult investments. Prices below US$ 60 will however reduce incentives for exploration in marginal frontier areas. Back to Kenya, pump prices now are apparently adjusting every month in keeping with the previous month average price of Murban crude oil which is mostly refined at Mombasa. This market pattern appears predictable whether prices are going up or down, which is a major improvement compared to older times when price increases were rushed , while decreases were delayed. Kenyans appear to have internalized and accepted the reality of high prices. Costs of goods and services have already gone up over the last few years and consumers adjusted their lifestyles, with the exception of course of the vulnerable groups who are visibly struggling. The upcoming middle income group continues to add more and more vehicles on the roads in spite of high gasoline prices , and this has increased gasoline sales in spite of high oil prices. In summary, it is unlikely that we shall experience prices going the way of 2008, and if anything they should settle downwards, unless a major geopolitical incident disrupts oil supply or causes panic in the supply chain. Wachira works with Petroleum Focus Consultants 6
  7. 7. MGW 2010 High Oil Good Grove/Petit Lab ***Instability links*** 7
  8. 8. MGW 2010 High Oil Good Grove/Petit Lab ME instability key high price Middle east instability is a catalyst for high oil prices McElroy [Kevin McElroy is a resource prospector for Wyatt Investment Research; June 2 2010 “What Will Make Oil Prices Rise this Summer?” http://www.wyattresearch.com/article/what-will-make-oil-prices-rise-this- summer/5366; 6/30/2010; K.C.] Oil investors are looking for any reason for oil to go up in price these days. We all tacitly know that much higher oil prices are coming. But with the economy in a perpetual cycle of stagnation, continued bad news from Europe, and concerns that growth is stalling in China, oil can’t seem to find a foothold. But I believe that oil is one minor war-action away from higher highs this summer. That brings me to something my wife and I encountered yesterday. I should note, I’m writing today’s issue from a hotel room in Boston. My wife and I are celebrating our first wedding anniversary this week. After spending yesterday afternoon ferrying between Boston’s harbor islands, we encountered what I believe may be the catalyst for higher oil prices this summer. In Boston Common, amid the hot dog stands and balloon vendors, hundreds of pro-Palestinian protesters greeted us on our walk back to our hotel in Back Bay. Being on vacation, and trying desperately to avoid television, we weren’t aware of the recent headlines from Gaza – where Israeli commandoes boarded a flotilla of activists headed for Israel’s blockade of the 20-mile strip of Palestine. The protestors all had the same old pro-Palestine signs, along with some language about a blockade but I didn’t think much of it –I’ve seen similar signage at International Monetary Fund protests in Washington DC, Republican rallies in Philadelphia, Democrat rallies in Baltimore, and pro-life/pro-choice marches everywhere in between. If you rally a few college students for a cause that someone finds worthy of protest, eventually, the Israel/Palestine contingent will show up to remind us that yes, the two nations still don’t get along. But I’m not here to pick sides – I’d sooner kick over a hornet’s nest than wade into Israeli-Palestinian politics. I’m here to survey the situation for its profit potential. And simply put, war in the headlines almost always means higher oil prices. War in the Middle East, even more so. Take a look at this chart that plots oil prices in 2008 dollars since the end of World War II: You can see how oil prices seem to track Middle East war headlines and little else. Will Israel and Palestine resume hostilities? I don’t know, but it’s exactly these kinds of headlines that act as a catalyst for higher oil prices. I use the word catalyst as a direct metaphor. If you remember from high school chemistry, a catalyst is a substance that increases the rate of a reaction. A skirmish in Gaza might not pinch the hose of oil supply one iota, but it can have the effect of making people bid the price of oil higher regardless of real supply and demand forces. And as we remember from the summer of 2008, sometimes higher oil prices themselves are a catalyst for ever-higher oil prices. The safe way to play higher oil prices is to buy the biggest and best oil companies. I use the companies in the AMEX Oil Index (AMEX: XOI) as a good starting point. These 13 companies represent the biggest publicly traded oil producers, drillers, explorers and developers. You can see the names of all 13 by clicking here. In 2008 when oil prices jumped from $90 up to $140, a 55% gain, this index only moved 30%, lagging oil prices a bit. You’ll see that BP Plc (NYSE: BP) is included in the index, which isn’t surprising given its size. I’ve been subtly pointing out that BP currently sells for about as cheap as you’re ever likely to see a blue-chip oil company. It could fall further, for sure – and until they’ve capped the leak, I expect them to. And while I think BP is a great buy, it’s also kind of abhorrent to put your capital into a company that’s responsible for thousands of gallons of oil being pumped into the ocean. So don’t buy BP today unless you want to own a company that’s polluting the Gulf of Mexico. But the rest of the companies in that index should greatly benefit from oil’s upside, and they have the added benefit of being huge, multinational blue chips. When oil prices fell 75% from $140 down to $35, this oil index only fell 50%. If you’re looking for a stock with the potential to double or triple in a matter of a few weeks, you might consider investing in a small domestic company that’s already producing oil in America’s largest oil reserve: the Bakken. According to The Wall Street Journal, the Bakken “could contain as much as 413 billion barrels of oil in place... That's bigger than Saudi Arabia's Ghawar field, which has 125 billion barrels.” My colleague and Energy World Profits Chief Investment Strategist Ian Wyatt recently finished a report all about an American company with the most producing wells in the entire Bakken formation. It’s a tiny company with a market cap under $900 million, so I can’t publish its name here – but it’s profitable today with oil at $74 a barrel. Any increase in oil prices seems to have a three-fold effect on this company’s stock price. 8
  9. 9. MGW 2010 High Oil Good Grove/Petit Lab ***Russia*** 9
  10. 10. MGW 2010 High Oil Good Grove/Petit Lab 2nc Russia High oil prices key to Russian economy – each 1 dollar drop causes a 5 billion dollar loss. Gawdat Bahgat (Centre for Middle Eastern Studies, Dept Political Science, Indiana U of Penn.) 2004 OPEC Review “Russia's oil potential: prospects and implications” v28 i2 p. 133 Since the collapse of the Soviet Union, the Russian economy has been in a state of transition, from a state-run economy to a free-market one. A delicate process of restructuring and diversification is underway. Still, the Russian economy is heavily dependent on oil revenue. This revenue represents a substantial proportion of the country's gross domestic product export earnings; in 2002, energy accounted for almost 20 percent of russia's gdp and 55 percent of export revenue. These figures indicate Russia's economy is extremely sensitive to global energy price fluctuations. The sensitivity implies a one dollar rise (drop) in the price of a barrel of Russia's urals blend benchmark leads to an increase (decline) in real GDP growth of about .5 percentage points and contributes to an estimated US $5 billion in extra earnings (losses). The relatively high and stable oil prices since 1999 brought a windfall in oil export revenue to the Russian economy, spurred strong growth in GDP and contributed to the overall economic recovery. Put differently, Russia's real GDP growth since 1999 has been an impressive 6.6 per cent per year. This strong recovery after the 1998 crisis can be explained by favourable external conditions in the form of high oil prices, as well as the effects of the sharp 1998-99 rouble devaluation/ Not suprisingly, in May 2003, The Russian government released its energy strategy to 2020, which designates the energy sector as the engine of economic growth. Global nuclear conflict Steven David (Prof. Political Science at Johns Hopkins,) Jan/Feb 1999 [Foreign Affairs AT NO TIME since the civil war of 1918 -- 20 has Russia been closer to bloody conflict than it is today. The fledgling government confronts a vast array of problems without the power to take effective action. For 70 years, the Soviet Union operated a strong state apparatus, anchored by the KGB and the Communist Party. Now its disintegration has created a power vacuum that has yet to be filled. Unable to rely on popular ideology or coercion to establish control, the government must prove itself to the people and establish its authority on the basis of its Russians know they can no performance. But the Yeltsin administration has abjectly failed to do so, and it cannot meet the most basic needs of the Russian people. longer look to the state for personal security, law enforcement, education, sanitation, health care, or even electrical power. In the place of government authority, criminal groups -- the Russian Mafia -- increasingly hold sway. Expectations raised by the collapse of communism have been bitterly disappointed, and Moscow's inability to govern coherently raises the specter of civil unrest. If internal war does strike Russia, economic deterioration will be a prime cause. From 1989 to the present, the GDP has fallen by 50 percent. In a society where, ten years ago, unemployment scarcely existed, it reached 9.5 percent in 1997 with many economists declaring the true figure to be much higher. Twenty-two percent of Russians live below the official poverty line (earning less than $ 70 a month). Modern Russia can neither collect taxes (it gathers only half the revenue it is due) nor significantly cut spending. Reformers tout privatization as the country's cure-all, but in a land without well-defined property rights or contract law and where subsidies remain a way of life, the prospects for As the massive devaluation of the ruble and the current political crisis transition to an American-style capitalist economy look remote at best. show, Russia's condition is even worse than most analysts feared. If conditions get worse, even the stoic Russian people will soon run out of patience. A future conflict would quickly draw in Russia's military. In the Soviet days civilian rule kept the powerful armed forces in check. But with the Communist Party out of office, what little civilian control remains relies on an exceedingly fragile foundation -- personal friendships between government leaders and military commanders. Meanwhile, the morale of Russian soldiers has fallen to a dangerous low. Drastic cuts in spending mean inadequate pay, housing, and medical care. A new emphasis on domestic missions has created an ideological split between the old and new guard in the military leadership, increasing the risk that disgruntled generals may enter the political fray and feeding the resentment of soldiers who dislike being used as a national police force. Newly enhanced ties between military units and local authorities pose another danger. Soldiers grow ever more dependent on local governments for housing, food, and wages. Draftees serve closer to home, and new laws have increased local control over the armed Divining the military's allegiance forces. Were a conflict to emerge between a regional power and Moscow, it is not at all clear which side the military would support. is crucial, however, since the structure of the Russian Federation makes it virtually certain that regional conflicts will continue to erupt. Russia's 89 republics, krais, and oblasts grow ever more independent in a system that does little to keep them together. As the central government finds itself unable to force its will beyond Moscow (if even that far), power devolves to the periphery. With the economy collapsing, republics feel less and less incentive to pay taxes to Moscow when they receive so little in return. Three-quarters of them already have their own constitutions, nearly all of which make some claim to sovereignty. Strong ethnic bonds promoted by shortsighted Soviet policies may motivate non-Russians to secede from the Federation. Chechnya's successful revolt against Russian control inspired similar movements for autonomy and independence throughout the country. If these rebellions spread and Moscow responds with force, civil war is likely. Should Russia succumb to internal war, the consequences for the United States and Europe will be severe. A major power like Russia -- even though in decline -- does not suffer civil war quietly or alone. An embattled Russian Federation might provoke opportunistic attacks from enemies such as China. Massive flows of refugees would pour into central and western Europe. Armed struggles in Russia could easily spill into its neighbors. Damage from the fighting, particularly attacks on nuclear plants, would poison the environment of much of Europe and Asia. Within Russia, the consequences would be even worse. Just as the sheer brutality of the last Russian civil war laid the basis for the privations of Soviet communism, a second civil war might produce another horrific regime. Most alarming is the real possibility that the violent disintegration of Russia could lead to loss of control over its nuclear arsenal. No nuclear state has ever fallen victim to civil war, but even without a clear precedent the grim consequences can be foreseen. Russia retains some 20,000 nuclear weapons and the raw material for tens of thousands more, in scores of sites scattered throughout the country. So far, the government has managed to prevent the loss of any weapons or much material. If war erupts, however, Moscow's already weak grip on nuclear sites will slacken, making weapons and supplies available to a wide range of anti-American groups and states. Such dispersal of nuclear weapons represents the greatest physical threat America now faces. And it is hard to think of anything that would increase this threat more than the chaos that would follow a Russian civil war. 10
  11. 11. MGW 2010 High Oil Good Grove/Petit Lab 2nc impact calc (1) Russian economic collapse causes nuclear war – he gives multiple scenarios, we’ll get each one to extinction: Nuclear meltdowns Harvey Wasserman (Senior Editor – Free Press) Spring 2002 Earth Island Journal, www.earthisland.org/eijournal/new_articles.cfm?articleID=457&journalID=63) The intense radioactive heat within today's operating reactors is the hottest anywhere on the planet. Because Indian Point has operated so long, its accumulated radioactive burden far exceeds that of Chernobyl. The safety systems are extremely complex and virtually indefensible. One or more could be wiped out with a small aircraft, ground-based weapons, truck bombs or even chemical/biological assaults aimed at the work force. A terrorist assault at Indian Point could yield three infernal fireballs of molten radioactive lava burning through the earth and into the aquifer and the river. Striking water, they would blast gigantic billows of horribly radioactive steam into the atmosphere. Thousands of square miles would be saturated with the most lethal clouds ever created, depositing relentless genetic poisons that would kill forever. Infants and small children would quickly die en masse. Pregnant women would spontaneously abort or give birth to horribly deformed offspring. Ghastly sores, rashes, ulcerations and burns would afflict the skin of millions. Heart attacks, stroke and multiple organ failure would kill thousands on the spot. Emphysema, hair loss, nausea, inability to eat or drink or swallow, diarrhea and incontinence, sterility and impotence, asthma and blindness would afflict hundreds of thousands, if not millions. Then comes the wave of cancers, leukemias, lymphomas, tumors and hellish diseases for which new names will have to be invented. Evacuation would be impossible, but thousands would die trying. Attempts to quench the fires would be futile. More than 800,000 Soviet draftees forced through Chernobyl's seething remains in a futile attempt to clean it up are still dying from their exposure. At Indian Point, the molten cores would burn uncontrolled for days, weeks and years. Who would volunteer for such an American task force? The immediate damage from an Indian Point attack (or a domestic accident) would render all five boroughs of New York City an apocalyptic wasteland. As at Three Mile Island, where thousands of farm and wild animals died in heaps, natural ecosystems would be permanently and irrevocably destroyed. Spiritually, psychologically, financially and ecologically, our nation would never recover. This is what we missed by a mere 40 miles on September 11. Now that we are at war, this is what could be happening as you read this. There are 103 of these potential Bombs of the Apocalypse operating in the US. They generate a mere 8 percent of our total energy. Since its deregulation crisis, California cut its electric consumption by some 15 percent. Within a year, the US could cheaply replace virtually all the reactors with increased efficiency. Yet, as the terror escalates, Congress is fast-tracking the extension of the Price-Anderson Act, a form of legal immunity that protects reactor operators from liability in case of a meltdown or terrorist attack. Do we take this war seriously? Are we committed to the survival of our nation? If so, the ticking reactor bombs that could obliterate the very core of our life and of all future generations must be shut down. Russia-China war Alexander Sharavin (Director of the Political and Military Analysis Institute) October 1 2001, What The Papers Say (Russia), Nezavisimoe Voennoe Obozrenie, No. 28, “The Third Threat,” Translated by Andrei Ryabochkin Now, a few words about the third type of war. A real military threat to Russia from China has not merely been ignored; it has been denied by Russia’s leaders and nearly all of the political forces. Let’s see some statistic figures at first. The territory of Siberia and the Russian Far East comprises 12,765,900 square kilometers (75% of Russia’s entire area), with a population of 40,553,900 people (28% of Russia’s population). The territory of China is 9,597,000 square kilometers and its population is 1.265 billion (which is 29 times greater than the population of Siberia and the Russian Far East). China’s economy is among the fastest-growing economies in the world. It remains socialistic in many aspects, i.e. extensive and highly expensive, demanding more and more natural resources. China’s natural resources are rather limited, whereas the depths of Siberia and the Russian Far East are almost inexhaustible. Chinese propaganda has constantly been showing us skyscrapers in free trade zones in southeastern China. It should not be forgotten, however, that some 250 to 300 million people live there, i.e. at most a quarter A billion Chinese people are still living in misery. For them, even the living standards of a of China’s population. backwater Russian town remain inaccessibly high. They have absolutely nothing to lose. There is every prerequisite for “the final throw to the north.” The strength of the Chinese People’s Liberation Army (CPLA) has been growing quicker than the Chinese economy. A decade ago the CPLA was equipped with inferior copies of Russian arms from late 1950s to the early 1960s. However, through its own efforts Russia has nearly managed to liquidate its most significant technological advantage. Thanks to our zeal, from antique MiG-21 fighters of the earliest modifications and S-75 air defense missile systems the Chinese antiaircraft defense forces have adopted Su-27 fighters and S-300 air defense missile systems. China’s air defense forces have received Tor systems instead of anti-aircraft guns which could have been used during World War II. The shock air force of our “eastern brethren” will in the near future replace antique Tu-16 and Il-28 airplanes with Su-30 fighters, which are not yet available to the Russian Armed Forces! Russia may face the “wonderful” prospect of combating the Chinese army, which, if full mobilization is called, is comparable in size with Russia’s entire population, which also has nuclear weapons (even tactical weapons become strategic if states have common borders) and would be absolutely insensitive to losses (even a loss of a few million of the servicemen would be acceptable for China). Such a war would be more horrible than the World War II. It would require from our state maximal tension, universal mobilization and complete accumulation of the army military hardware, up to the last tank or a plane, in a single direction (we would have to forget such “trifles” like Talebs and Basaev, but this does not guarantee success either). Massive nuclear strikes on basic military forces and cities of China would finally be the only way out, what would exhaust Russia’s armament completely. We have not got another set of intercontinental ballistic missiles and submarine-based missiles, whereas the general forces would be extremely exhausted in the border combats. In the long run, even if the aggression would be stopped after the majority of the Chinese are killed, our country would be absolutely unprotected against the “Chechen” and the “Balkan” variants both, and even against the first frost of a possible nuclear winter. An aforementioned prospect is, undoubtedly, rather disagreeable and we would not like to believe it can be true. However, it is a realistic prospect - just like a war against NATO or Islamic extremists. 11
  12. 12. MGW 2010 High Oil Good Grove/Petit Lab 2nc impact calc (2) Prolif Stuart Taylor Jr (National Journal senior writer, contributing editor at Newsweek) September 16 2002, Legal Times, “Worry about Iraq’s intentions, but focus on the bigger threat: nuclear weapons controlled by any terrorist or rogue state,” Unless we get serious about stopping proliferation, we are headed for “a world filled with nuclear-weapons states, where every crisis threatens to go nuclear,” where “the survival of civilization truly is in question from day to day,” and where “it would be impossible to keep these weapons out of the hands of terrorists, religious cults, and criminal organizations.” So writes Ambassador Thomas Graham Jr., a moderate Republican who served as a career arms-controller under six presidents and led the successful Clinton administration effort to extend the Nuclear Nonproliferation Treaty. 12
  13. 13. MGW 2010 High Oil Good Grove/Petit Lab High prices key (1) Even a temporary end to the oil boom would dry up the Russian economy – best new studies Paavo Suni (analyst for the Research institute of the Finnish Economy) 2007 “Oil Prices and the Russian Economy: Some Simulation Studies with NiGEM,” Elinkeinoelämän Tutkimuslaitos discussion papers, pdf downloaded from http://ideas.repec.org/p/rif/dpaper/1088.html The temporary end of the current commodity boom would cause serious difficulties in the Russian economic development as the fuel for the engine would dry. The more robust growth would necessitate drastic changes in the economic structure from resource based economy towards more normal economic structure. There is a danger that while energy effects dominate the Russian economic development, the need to create fruitful circumstances for the growth of the non-oil sector is seriously underestimated as the short term gains from higher energy prices are so large. Here, more openness in the economy and the use of oil fund would serve as an important impetus to raise the productivity and the competitiveness of the production outside the energy sector in the longrun. Openness of the economy would provide the necessary competition to check the price structures and give correct price signals to the non-resource economy for its development. The recent success in WTO membership negotiations is a good signal in this direction. However, recent Russian policies to support the monopolistic nature of the energy sector as well as export duties raises the vulnerability of the economy to decline in the raw material prices and especially those of the energy may undermine the ground behind normalisation of the economy. We control uniqueness: Russian economy is strong now due to high oil prices Paavo Suni (analyst for the Research institute of the Finnish Economy) 2007 “Oil Prices and the Russian Economy: Some Simulation Studies with NiGEM,” Elinkeinoelämän Tutkimuslaitos discussion papers, pdf downloaded from http://ideas.repec.org/p/rif/dpaper/1088.html During the past several years, the Russian economy has been outperforming well and the development has beaten the forecasts since the Russian crisis in 1998 . The economy opened up rapidly after the crisis in terms of exports per GDP. In early 2000’s, the trend started to reverse. However, the export to GDP share stabilised to above 30 per cent thanks to Russia’s most important export product, as well as other energy commodities and raw materials in general which Russia also exports. Russia has thus benefited both from exporting more energy commodities in volume terms and from the improvement in its terms of trade due to the rise in oil and other commodity prices. As a result, domestic demand has received a strong growth impulse. This development has been initiated and reinforced by the lagged effects of the 1998 collapse in the value of the Russian rouble, which drastically improved the international price competitiveness of Russian products. Also public sector revenue has increased considerably due to, among other things, the taxes imposed on oil exports. However, we will not discuss the significance of the oil fund that the Russian government has been cumulating, while the use of it is very important in creating the future of the Russian economy. 13
  14. 14. MGW 2010 High Oil Good Grove/Petit Lab High prices key (2) Investment due to high oil prices is causing record growth in Russia. Jason Bush, Business Week staff, 2-20-06 (lexis) Down the road at the Rolf car dealership, Oxana Starostina is filling in registration forms for her new Mitsubishi Lancer, purchased with $20,000 in cash. She and her husband, Maxim, saved the money from their small construction supply business. ``Living standards are improving. If you are young or middle-aged and earn $1,000 a month, then you can afford to buy a new car,'' she explains. Last year the dealership earned an award for being the world's best-selling Mitsubishi outlet. On an average day in 2005, Rolf sold 15 to 20 Mitsubishi Corp. and Hyundai Motor Co. autos costing $15,000 to $60,000. These aren't the only carmakers prospering. Last year, Ford Motor Co.'s sales in Russia increased an impressive 54%. Ford now has more than 11% of the Russian car market after launching local production of its flagship Ford Focus in 2002. When most investors think of Russia, they think energy -- the fall of Yukos, the rise of Gazprom, and the muscular petropolitics of the Kremlin. But for many multinationals from the U.S., Europe, and Asia, the consumer boom, not oil and gas, is the investment story to watch. Last year, Russia drew a record $16.7 billion in foreign direct investment, 38% more than in 2004. Consumer-related sectors attracted the lion's share. Big deals included Coca-Cola Co.'s $600 million acquisition of Russian fruit-juice maker Multon, $750 million in acquisitions by Dutch brewer Heineken, and investments in car production from the likes of Toyota and Volkswagen. What's attracting these companies is the surprising strength of the Russian consumer, not just in Moscow but also, increasingly, in other cities catching up with the capital's breakneck economic development. Russia's gross domestic product grew by 6.4% last year and has averaged 7% growth over the past five years. Dollar income per capita has risen by nearly 29% per annum over the same period, faster even than in China. AN EXPLOSION Rising disposable income and a growing middle class have caused an explosion in all types of consumption. Last year, sales of new foreign cars reached 600,000, a 57% increase on 2004 and a sixfold rise since 2001. Mobile-phone ownership has mushroomed from 3 million in 2000 to 80 million today. No less than a fifth of all households own a computer, four times the figure in 2001. ``The most striking thing is the overall growth of consumer potential. It's shown by literally all measures,'' says Alexander Demidov, managing director of GfK Rus market research in Moscow. What makes the buying surge all the more remarkable is that the average income per person, while growing fast, is still just $300 a month. Yet a surprising number of Russians live as well or better than their Western counterparts. The richest tenth of Russia's population earns around 15 times as much as the poorest tenth. At latest count (2004), Russia was home to an estimated 88,000 millionaires, according to a study carried out by Merrill Lynch & Co. and Capgemini. And it's not only the millionaires who are buying cars at the Rolf dealership chain, Russia's largest foreign-car importer and distributor, says President Matt Donnelly. He estimates that 8 million Russians earn at least $2,000 a month, and 3.5 million earn double that. ``It doesn't sound like a lot, but they have masses to spend,'' he adds. That's because some 70% of Russians' income is disposable, vs. around 40% for a typical Western consumer. ``We have 13% flat income tax, subsidized housing and utilities, and 10% savings. The rest of it is pretty much out there being spent,'' says Natalia Zagvozdina, a consumer-goods analyst at Moscow investment bank Renaissance Capital. THIRST FOR JOE No one should underestimate the consuming potential of Russia's wider public, either. Multinational food and drinks companies, the biggest consumer- goods investors in Russia, have already discovered that mass-market opportunity. ``As soon as people step out of poverty, they become potential Nestle customers,'' says Bernard Meunier, country manager for the Swiss food giant, which has pumped $500 million into Russia to date. Nestle's most recent foray, a $120 million instant-coffee factory that opened in Krasnodar, in southern Russia, last November, was its first international greenfield investment for two decades. Why there? With an average of 250 cups per person per year, Russia consumes more instant coffee than any other country. Russians' thirst for joe is a sign that the consumption boom is driven as much by changing tastes and lifestyles as by rising incomes. Prior to the 1990s, Russians barely touched the stuff, preferring tea. Beer is a similar case. Beer consumption has risen from 15 liters a head in 1995 to 60 liters in 2005, just a few liters shy of the European average. Rapid growth has lifted profits for companies such as Denmark's Carlsberg, which owns 50% of leading Russian brewer Baltic Beverages Holdings. Analysts calculate that there's still plenty of potential for growth in fields such as tourism and financial services as well as consumer durables like automobiles, furniture, and electronics. Appliances giant Whirlpool Corp. is planning to make washing machines in Russia, in partnership with Turkey's Vestel Group. American Express Co. launched its first ruble credit cards in December, working in partnership with Russian Standard Bank. ``This is a market for the future, and we think it's got real opportunity,'' says American Express Executive Vice-President Gary L. Crittenden. There are still openings for relative latecomers to the market, too. ``The results are far better than even our most optimistic forecasts,'' says Leszek Krecielewski, country manager for Ada (Mich.) direct-sales giant Amway Corp., which began selling cosmetics and detergents in Russia last March. Sales reached $110 million in nine months, above forecasts of $100 million for the first year, and were a big chunk of Amway's $600 million in European sales in 2005. The company projects Russian sales will rise to $200 million this year. Will the consumer boom last? Russia's economy remains closely tied to global oil prices and could face an upset if prices plunge. Then again, persistently high oil prices mean economists are raising their forecasts of Russians' future income and consumption. Goldman, Sachs & Co. predicts Russia will be the world's eighth-largest economy by 2025, with per capita income of $45,000. China and India are hot. But Russia is heating up fast, too. 14
  15. 15. MGW 2010 High Oil Good Grove/Petit Lab A2 prices will return to high levels [Read the first page of “Russian economy – High Prices Key”] High oil prices must be sustained – temporary decline wreaks havoc Paavo Suni (analyst for the Research institute of the Finnish Economy) 2007 “Oil Prices and the Russian Economy: Some Simulation Studies with NiGEM,” Elinkeinoelämän Tutkimuslaitos discussion papers, pdf downloaded from http://ideas.repec.org/p/rif/dpaper/1088.html According to the results, the sudden and permanent positive oil price shock will raise Russia’s domestic demand and GDP rapidly for the first three years up until 2009. At that point the level of domestic demand will be 8 per cent and that of GDP almost 5 per cent higher than in the baseline scenario. Thereafter the difference with respect to the baseline scenario starts to decline, but it will not vanish completely during the 20-year simulation period. Effects are driven by changes in export income, risen net foreign assets and by the effects of the change in prices on labour market equilibrium. In the long-run output is higher, and the scale of the effect depends on the importance of commodities in output and the size of the increase in prices. Also as a result of higher oil prices, the current account balance will naturally improve pronouncedly in 2007 but the effect will start to diminish rather quickly as higher domestic demand will increase imports and the value of GDP will grow. The current-account surplus will still remain larger than without the oil price shock. There is also a hike in consumer price inflation, which also will soon start to diminish. In a longer term, the deflator will be unchanged with respect to the baseline by 2012. These results indicate that any oil price increases will fade relatively quickly if there are no further price increases. The current-account-surplus-to-GDP ratio will also start to decline rapidly after a jump. Thus the economy is vulnerable to a possible decline in oil prices as the process functions, in principle, also the other way around. We checked the effects also using forward expectations. Using forward expectations did not change the overall picture. The size of the effects were fairly similar with some differences in timing, which can be seen e.g. in the Figure 12. 15
  16. 16. MGW 2010 High Oil Good Grove/Petit Lab A2 oil is small share of GDP Statistics tend to underestimate – it’s a full 30% of GDP Paavo Suni (analyst for the Research institute of the Finnish Economy) 2007 “Oil Prices and the Russian Economy: Some Simulation Studies with NiGEM,” Elinkeinoelämän Tutkimuslaitos discussion papers, pdf downloaded from http://ideas.repec.org/p/rif/dpaper/1088.html The share of oil and other energy production in Russia’s total GDP is difficult to estimate. The official statistics tend to underestimate the share. According to Russian statistics, the share of the fuel industry3 is some 5.5 per cent of Russia’s GDP. According to the GTAP database, fuel industry (i.e. coal, oil, gas and other minerals) accounted for 19 per cent of Russia’s GDP at basic prices in 2001 when measured as a share in factor income by sectors. According to World Bank (2004, 2005), the share of oil and gas in Russia’s GDP in 2002 was 25 per cent. According to the Russian government, as quoted by Juurikkala and Ollus (2006), the energy sector accounted for 30 per cent of the Russian GDP in 2005. (See also Kaitila and Suni, 2007, for a discussion of this issue.) 16
  17. 17. MGW 2010 High Oil Good Grove/Petit Lab A2 oil funds chechnya war We turned this in the 1NC – David says ethnic war is inevitable if the economy declines. Separatists and terrorists attacks will escalate to war. We outweigh their external impact turn – our impact is a war with the entirety of Chechnya, not just separatists extend the nuclear terrorism scenario from the overview. Turn – Putin won’t simply withdraw from Chechnya, the plan forces him to use tactical nuclear weapons as a last ditch effort. Stratfor 1-17-2000 [http://www.rense.com/politics6/threats.htm] The final audience for this announcement is perhaps the most important: the Russian public. Putin has been enormously popular for taking vigorous action to end his country's declining world status. The announcement intrinsically satisfies Russians and helps boost Putin's popularity on the verge of his campaign for the presidency. As winter grips Chechnya and large-scale military operations, particularly air operations, become more difficult, the emergence of the nuclear threat suggests an end to the war even if conventional forces fail. . Putin's announcement on nuclear weapons is therefore an attempt to re-order Russia's relationship with the United States, the rest of the West, the former republics of the Soviet Union and ultimately, to reconcile Russia's own self-image. It is a clever move similar to the U.S. strategy of using nuclear threats to limit the maneuvering room of other players. But it must be remembered that the United States was primarily fighting for the global balance of power. The Russians today are fighting for the very survival of their federation. That means that the threat to use nuclear weapons, an element of war games in the United States, has some very serious possibilities when used by the Russians. It is not inconceivable that the Russians, frustrated by their inability to seal their frontier with Georgia and by Georgia's inability or unwillingness to work with them, would use tactical nuclear weapons. Putin remembers Afghanistan well. He is not going to be drawn into another Afghanistan, nor is he going to withdraw from Chechnya. In the extreme case, anything is possible. And that is precisely the ambiguous situation Putin wants to create. He wants Russia's antagonists to peer into the abyss and see the worst. He is calculating, quite rightly we think, that this will dramatically increase the caution and respect with which Russia is treated. That will yield an international payoff for Russia - and a massive domestic payoff for Putin. Putin will use oil money for economic reforms – that’s our Bhagat 1NC card and more evidence from Sands in 04. David Sands September 6 2004 Washington Times http://washingtontimes.com/world/20040905-105320-4360r.htm The oil bonanza has cut both ways for Mr. Putin, who has used some of the money to cushion the pain of economic reforms on other fronts. The central government has used oil money to make up pension shortfalls, preserving worker and retiree incomes while cutting employer payroll taxes by 10 percent. High prices key to prevent collapse of the entire Russian state, outweighs their scenario. Nikolas Gvosdev March 29 2004 The National Interest The Sources of Russian Conduct, lexis] Of course, Putin's revival may prove to be ephemeral. Thehigh oil prices that have sustained Russia's economic recovery might crash. Russia itself may prove unable to cope with its severe demographic crisis. Putin's gamble that managed pluralism today will produce social harmony and economic prosperity tomorrow might fail. Plainly put, it is very possible that the "Russia question" could be solved by the complete collapse of the Russian state. 17
  18. 18. MGW 2010 High Oil Good Grove/Petit Lab A2 russian expansionism bad (1) Russian collapse outweighs: no matter how bad the Russian state is, complete anarchy with 20,000 nuclear weapons is worse, and makes their impacts inevitable since the military would lash out – That’s David ’99. Major political players in Russia have no desire for a confrontational foreign policy Jeffery Mankoff (post doctoral fellow at Olin Institute for Strategic Studies @ Harvard) Spring 2007 The Washington Quarterly, p123-135, online: http://www.twq.com/07spring/docs/07spring_mankoff.pdf Looking at government documents, official statements by government figures, and discussions among Russian intellectuals, the set of ideas underlying Russian foreign policy has remained fairly constant, at least since the mid-1990s. The Russian consensus emphasizes the existence of a multipolar world order in which Russia is one of the principal poles, alongside at least the United States, Europe, and China, and the existence of an essentially anarchic world system in which power and states matter more than norms and institutions. During 2006 and 2007, Russia has found itself more powerful both in relative and absolute terms than in recent years. This change in relative power is more responsible for the increased tension between Russia and the West in 2006 than any newfound aggressive impulse in the Kremlin. Long term trends indicate Russia won’t seek confrontation Jeffery Mankoff (post doctoral fellow at Olin Institute for Strategic Studies @ Harvard) Spring 2007 The Washington Quarterly, p123-135, online: http://www.twq.com/07spring/docs/07spring_mankoff.pdf This view of Russia as a rival reemerged with a vengeance in early 2006 following the crisis over Russian gas deliveries to Ukraine, when it appeared Moscow was using its control of natural resources to pressure Kyiv into abandoning its pro-Western foreign policy. The Kremlin’s decision to challenge Western participation in several major oil and gas exploration projects, notably Sakhalin-2, and its prominent support for separatist rebels in Georgia (South Ossetia and Abkhazia) and Moldova (Transdnistria) had exacerbated tension with the West even before the shocking deaths of Litvinenko and investigative journalist Anna Politkovskaya in late 2006. An independent task force commissioned by the Council on Foreign Relations warned as early as March 2006 that “cooperation [between Russia and the West] is becoming the exception, not the norm.”1 Although relations with Russia are in a difficult phase at the moment, it is important to avoid overreacting and concluding that the Kremlin is newly intent on challenging the West. This all too common view ignores the trajectory of Russian foreign policy over the longer term, which suggests that Moscow has little desire for confrontation. In foreign policy terms, Russian behavior in 2006 has been quite consistent with the strategy pursued by the Kremlin for the past decade, whose fundamental component is not challenging Western influence but proving that Moscow still matters internationally. Central Asian oil is a prerequisite to Russian expansionism Cohen, PhD and Senior Policy Analyst at Heritage, 1996 (Ariel, Heritage Foundation Reports, 1-25, Lexis) The Russian military and security services are by far the most resolute driving force behind the restoration of a Russian- dominated CIS. They are playing a key role in ensuring Moscow's control over the pipeline routes. The end of the Cold War and the collapse of the Berlin Wall terminated, at least temporarily, confrontation with the West, leaving the Red Army's General Staff, the Russian military intelligence (GRU), and the former KGB desperately seeking new missions. The biggest of these new missions is to establish control over Caucasus and Central Asian oil, establishing a Russian sphere of influence in the process. The Russian army and security services seek to deny foreign companies the right to export oil without their control. Russian military activities over the last four years indicate an attempt to consolidate strategic control of oil sources and export routes in Eurasia. For example, the war in Chechnya blocked an important pipeline from Azerbaijan through Grozny, and the victory of the Abkhaz separatists, supported by the Russian military, further secured the Russian oil terminals in the ports of Novorossiysk and Tuapse. In order to obtain an oil route in the region, Western exporters may be pressured to reach accomodations with the Russian generals. 18
  19. 19. MGW 2010 High Oil Good Grove/Petit Lab A2 russian expansionism bad (2) High oil prices prevent Russia from getting that oil – we access Russian expansionism best Starr, chairman of the Central Asia-Caucasus Institute and a research professor at Johns Hopkins, and Cornell, research director of CACI and assistant research professor at Johns Hopkins, Winter 2005 (S. Frederick and Svante E., “The Politics of Pipelines: Bringing Caspian Energy to Markets,” Paul H. Nitze School of Advanced International Studies, http://www.sais-jhu.edu/pubaffairs/publications/saisphere/winter05/starr- cornell.html The oil and gas deposits of the Caspian basin constitute less than a twentieth of the world’s reserves, but they are significant nonetheless. They are among the largest new reserves to be exploited in recent years, and hence are important to the highly fungible world oil market. And because hydrocarbons are by far the biggest source of wealth in three of the newly independent countries (Azerbaijan, Kazakhstan and Turkmenistan), a major factor in a fourth (Uzbekistan) and can provide decisively important transit fees and duties to two otherwise impoverished countries (Afghanistan and Georgia), earnings from oil and gas will decisively affect the economies, and the sovereignties, of at least five geopolitically important states. As oil prices roar upwards of $70 per barrel, the task of extracting and bringing to market oil and gas resources from distant areas becomes a pressing concern of every consumer country. This once again puts the spotlight on the Caspian basin. Here are significant reserves, but reserves that are located at great distance from all their potential consumers in Western Europe and Eastern Asia. Moreover, the only way these resources can reach those markets is by traversing vast territories overland by means of pipelines, a far less efficient means of transporting energy than sea tankers. Worse, the pipelines must often pass through topographically challenging and politically complex territories, further adding to their cost. Added to the geographical problem is the political legacy of the U.S.S.R., which bequeathed to the new states a “one-hub” energy transmission system that sent all ”colonial energy” to the center and none directly abroad. Somehow, the producer states must break out of this straightjacket. These two liabilities long impeded the development of these resources. Under such circumstances, it is no wonder that each of the many pipeline routes and projects proposed over the past decade presents its own technical and financial challenges, and each involves the most intricate combinations of corporate and state interests. Nor is it any wonder that all this has led often to a state of confusion, in which practical schemes have been dismissed as unworkable and in which grandly impractical schemes are deemed somehow practical. Talk of a pipeline to bring Russian gas to India via Tibet is only the most flabbergasting of many examples of the fanciful direction such speculation has taken. The fundamental change in the fate of Caspian oil has been the rise in world prices. Thanks to this, many projects that once seemed laughable now merit serious attention. Hence, building pipelines from Central Asian states through Afghanistan to Pakistan or even beyond to India is now being considered, while concrete plans are being made for a pipeline connecting Kazakhstan’s oil fields with China. A major project that was considered all but dead five years ago has now been completed: the Baku-Tbilisi-Ceyhan (BTC) pipeline bringing Azerbaijani Caspian oil to the Turkish Mediterranean coast. Although this remarkable achievement makes West Caspian oil available to world markets in serious quantities, the same is not true for the East Caspian and onshore Central Asian resources, which continue to be exported mainly to Russia at prices that are unfavorable conditions for producers. Even this, however, may be about to change. During the last decades of the U.S.S.R., its Russian leaders focused their energy investments on West Siberia, which they saw as safely “Russian,” to the neglect of existing oil fields in Azerbaijan and undeveloped fields in Kazakhstan, which they feared were dangerously subject to influence by the local Turkic peoples. Such fears were driven by census data that showed high birth rates among the Turkic peoples of the Caspian basin and low rates for Russians and Slavs. Similar fears also assured that all pipelines from the Caspian basin would head directly to Russia and its centralized grid. Russia is a status quo power, and needs Central Asian oil to ever be expansionist Power and Interest News Report November 5 2004 (“Growing Russian Influence in Central Asia,” http://www.pinr.com/report.php?ac=view_printable&report_id=232&language_id=1, accessed October 20, 2007) Russia also has vital interests in the oil and gas complexes of Central Asia. The region possesses enormous reserves, making it important for Moscow to pursue economic advantages while simultaneously fulfilling the strategic role of ensuring Russian control in the sphere of oil and gas production and transportation in its near abroad. In addition, Russia seeks to avoid economic isolation by building new pipelines across its territory. The activities of Russian oil and gas companies in Central Asia are growing in Kazakhstan, where the struggle for control of oil exports has already started. This is true to a lesser degree in Turkmenistan and Uzbekistan. Russian political analysts tend to look at their country as a status quo power in Central Asia that prefers gradual transformation as a choice between rapid transition to democracy and maintaining stability. They prefer a process of gradual transformation underscored by stability rather than attempts at the imposition of Western-style democratic models alien to these states. 19
  20. 20. MGW 2010 High Oil Good Grove/Petit Lab 20
  21. 21. MGW 2010 High Oil Good Grove/Petit Lab ***A2 high oil bad*** 21
  22. 22. MGW 2010 High Oil Good Grove/Petit Lab A2 oil shocks Shocks have zero effect on the economy – we just had one, and all economists agree no impact Jerry Taylor and Peter Van Doren (senior fellows at the Cato Institute) October 17 2007 “No need to fear oil shocks,” National Post Although oil prices hit US$80, the inflation, unemployment and recession that supposedly follow oil-price shocks are nowhere on the macroeconomic radar screen. If the economy goes into a tailspin, it will be in response to bad news in the housing market, not the oil market. The lesson to be derived from this is pretty clear: While oil-price spirals are certainly nothing for consumers to celebrate, the health of the economy is not held hostage to oil markets. The orthodox view that governed our understanding of oil-price shocks until recently was that the economic damage associated with those shocks was not the result of oil-price increases per se. Higher oil prices, after all, simply make oil producers richer, and everyone else poorer. Over the long run, more money spent on oil equals less money spent on everything else. This reduces the demand for, and thus the price of, everything (including labour!) save for oil. As long as oil producers are spending and/or investing their increased profits, the net effect of all this -- from a macroeconomic perspective--is zero. All of this will eventually happen, but the length of time required to get oil consumers to adjust their behaviour in response to a price shock is what was thought to trigger the economic downside associated with an oil crisis. If wages and consumption rates outside the oil sector fail to go down, either unemployment will follow or inflation will result, because there's only so much money to go around, unless the Federal Reserve accommodates everyone's demand for money. The main dissenting view was most strongly forwarded by then Princeton University economist and now Federal Reserve Board chairman Ben Bernanke and his colleagues. They argued that different ("better") monetary policy -- more specifically, one that maintains the federal funds rate at a constant level, rather than raising it in the face of an oil shock -- could reduce or even eliminate the recessionary effect of oil shocks. Economists James Hamilton and Anna Herrera, however, were skeptical of that proposition. They argued that the "better" monetary policy advocated by Bernanke et al. effectively calls for massive declines in the federal funds rate over the entire course of an oil shock, something that is probably not possible in the real world. Moreover, the Federal Reserve would have to keep the funds rate below levels anticipated by market actors for 36 months in a row, which is, of course, an unlikely proposition. Interestingly enough, the Federal Reserve, now chaired by Ben Bernanke, is not pursuing the policies advocated by its chairman when the chairman was in the academy. That was the state of the debate until the most recent price shock. The economy's failure to respond to one of the steepest oil-price increases in history with a recession, however, sent economists back to the theoretical drawing board. All the new analyses agree that the more flexible economy that we have now allows us to cope more easily with oilprice shocks. It underscores the danger of the price-control regimes of the 1970s, something that politicians are increasingly flirting with as energy prices continue to climb and put into question a panoply of government programs. Oil Prices would have to rise to 200 dollars a barrel to hurt the economy Sunday Times 8/15/04, <Oil soars again, but no need to panic just yet L/N> The Bank also pointed out that all advanced economies have become less sensitive to oil, Britain particularly so. The decline of heavy, energy-intensive manufacturing means that OECD countries use just over half as much oil for a given level of gross domestic product (GDP) as in 1970. In Britain the decline has been even more pronounced -the oil intensity of GDP is only 40% of what it was three decades ago. Just to be clear, this does not mean we use less oil now; it means that oil consumption has risen much more slowly over time than GDP. Adding these two bits of information together produces an interesting result. For high oil prices to have the same effect on the economy as in the 1970s we need to adjust both for the fact that real oil prices were higher in the past and that economies were more oil-sensitive. I calculate that it would need an oil price of just over $ 200 (£110) to produce the same kind of inflationary and recessionary shocks as in the past. That would be uncharted territory and is not remotely on the agenda. According to CSFB, the highest-ever oil price, in today's prices, was $ 95 a barrel in the late 19th century. Diversity cushions shocks International Oil Daily June 10 2003 HEADLINE: Diversity of Oil Market Helps Cushion Against Price Shocks: BP World oil supply is becoming "more diverse," while global production capacity "comfortably exceeds" demand, BP's chief economist, Peter Davies, said Tuesday in London, at the launch of the BP Statistical Review of World Energy 2003.The underlying factors for the trend include a significant 1.45 million barrel per day increase in non-Opec oil output last year, coupled with largely flat demand growth. The exception was China, which accounted for all of the increase in oil demand last year, and 68.5% of the rise in global primary energy consumption. As a result, Davies said oil markets proved resilient and flexible, with current structures able to maintain oil supplies without excessive price spikes during the Iraqwar and unexpected disruptions. "Producers were able to meet the needs of oil consumers during the Iraqwar and during unplanned supply disruptions in Venezuelaand Nigeria. Consuming nations were not required to tap their emergency reserves," he said. 22
  23. 23. MGW 2010 High Oil Good Grove/Petit Lab A2 shocks crush US economy US economy is resilient to shocks Malcolm Gillis (professor of economics at Rice University) May 8 2002 “Engines of the World Economy,” Offshore Technology Conference, http://www.professor.rice.edu/professor/05082002.asp?SnID=2 III. The U.S. Economic Engine: Resiliency in Diversity Except for Morgan Stanley, most forecasters are seeing "V"s, not "W"s in our economic future, with the economy growing at an annual rate of 3.0 percent to 3.5 percent over the next twelve months. The implicit assumption underlying this rosy scenario must be that there will be no severe economic shocks from any geo-political disturbances. The recent recession was one of the mildest and shortest on record. Before 1940, recessions averaged about a year and a half in length. Since 1960, their average length has been eleven months. The downturn of 2001 lasted only nine months. Several factors were responsible for the apparent shallowness of the recession. Consumer spending held up surprisingly well, aided by a big lift from motor vehicle sales and a housing market vibrant enough to offset much of the decline in household wealth from a weak stock market. Strong consumer spending was needed to counter the drag in spending coming from business, exacerbated by a very sharp increase in liquidation of business inventories. In the Conan Doyle's "Silver Blaze," Holmes solved the case by finding a dog that did not bark. In our tenth postwar recession, the oil price was the dog that did not bark. Higher oil prices have figured in every recession since 1970, except the current one. Nominal oil prices remained relatively stable, below $20 bbl. until early this year. Per barrel prices rose above $21 only after the recovery was underway. Oil price spikes matter much less in today's $10 trillion economy than in the smaller and less diversified U.S. economy of 1973, or even 1978. And, surprising to some, the real inflation-adjusted price of oil in February 2002 was only 40 percent of its level in 1980. And even at oil prices of May 1, the real price was less than half its 1980 level. In fact, relative prices of oil appear rather puny when contrasted with the prices of other life- supporting liquids. In late April, the price of one important refined petroleum product, gasoline, was only about $1.50 per gallon, including gasoline taxes. Other fluids prices spiked much higher. Orange juice was more than $5.00 a gallon, and in late April, Perrier and other high-end water was running about $6.50 to $7.00 per gallon. There were other reasons for the relative mildness of the recession of 2001. Two factors under-girded consumer spending and soothed investor expectations during the recession: 1) monetary policy, 2) fiscal policy. Never before in our nation's history has the Federal Reserve deployed such aggressive monetary policy against recession: By the end of calendar year 2001, the federal funds rate had been reduced to less than one-third its level on New Year's Day, in an unprecedented series of twelve reductions in eleven months. Fiscal policy reinforced the tonic effect of adroit and timely monetary policy: while the tax cut enacted in June was not planned as an anti-recessionary device, it served that purpose admirably, largely because it was enacted just after the recession began. US can withstand disruptions Gal Luft (executive director of the Institute for the Analysis of Global Security) July 5 2007 “Iran’s Oil Industry: A House of Cards?,” inFocus, http://www.iags.org/n050707.htm Considering the long-term risks associated with a nuclear Iran, higher prices at the gas pump should not drive any Western country's Iran policy. No doubt, if Iran's production falls, due to investors' departure or a calculated decision by Iran to use the oil weapon and cut its production, there will be economic fallout. However, Iran will be the main casualty of any disruption. Additionally, in recent years, the U.S. economy has shown remarkable resiliency in the face of mounting oil prices and can withstand even higher prices. There is also a safety net in place. Most major oil consuming countries maintain massive strategic petroleum reserves in the event of a drop in supply. The U.S. alone has some 700 million barrels of oil in reserve – two years worth of Iranian exports. To insulate the U.S. further, President Bush seeks to double the size of the American oil reserve in the coming years. The President also seeks to reduce America's oil dependence through increased efficiency and to shift to alternative fuels. Applied in unison, these tactics advance the strategic goals of reducing global energy prices, protecting the West against supply disruptions, and limiting the flow of petrodollars to Tehran. This increased pressure on the Iranian regime could, over time, generate a much desired regime change. If Washington executes this strategy with expediency and determination, this outcome could be achieved before Iran becomes a nuclear power. Low oil prices cause scarcity by undermining additions to existing reserves Leonardo Maugeri, ENI SPA's senior vice-president of corporate strategies and international relations, senior fellow at the World Economic Laboratory at MIT, a senior fellow at the Foreign Policy Association, and a member of the executive council of the Center for Social Investment Studies, degree in petroleum economics and a PhD in international political economy,, 12/15/2003, Oil & Gas Journal Given current oil consumption levels, every additional percentage point of recovery means 2 more years in terms of the life-index of existing reserves. Overall, cost and price are the pivotal variables for increasing reserves. Cheap oil (i.e., oil with a price that does not significantly exceed the breakeven cost of producing and marketing oil in the long term) leads to a reduction of investment in both new exploration and technology, thus undermining future additions to existing reserves. 23
  24. 24. MGW 2010 High Oil Good Grove/Petit Lab A2 shocks – predictions wrong Predictions of oil shocks are propagandistic doomsaying Stephen Moore, director of fiscal policy studies at the Cato Institute, March 17, 1999, “Low Oil Prices: A Fill Up of Good News,” http://www.cato.org/dailys/03-17-99.html First, apocalyptic predictions from academics, government officials and the media should always be treated with a healthy dose of skepticism. Many of the doomsayers who predicted $100 a barrel oil in 2000 are the same people who falsely predicted nuclear winter, massive famine across the globe, cities so polluted that gas masks would be required and other crises of biblical proportions. And these are the same pessimists who somehow have concluded that low oil prices are the problem. Just remember these Chicken Littles have a perfect record: they have been wrong every time. 24
  25. 25. MGW 2010 High Oil Good Grove/Petit Lab A2 shocks – self correcting Oil shocks heal themselves without government interference Jerry Taylor, director of natural resource studies at the Cato Institute and adjunct scholar at the Institute for Energy Research, and Peter VanDoren, editor of Regulation magazine, Journal of International Affairs, Fall 1999, p. 216 The 1990 Iraqi oil shock illustrates how oil markets behave if the government does nothing. After the Iraqi invasion of Kuwait in August 1990, the world market suffered a shortfall of about 4.5 million barrels a day (bid) out of a total world supply of crude oil of approximately 61 million b/d. Prices jumped from $16 per barrel in June 1990 to $30 in September. The shortfall in supply in this case was about 7.4 percent. While prices increased by 85 percent, by the next year prices had returned to pre-shock levels. The Gulf War oil shock was not without economic consequences, but the effects were much less than the effects of the shocks of the l970s. This is particularly striking since the shortfall generated in 1990 was larger than those generated in 1973 or 1979 (3 percent and 6 percent respectively).22 The main difference was that the U.S. government did not create an elaborate price-control system to take away the profits that came from the sudden increase in value of inventories. Once owners realized that the price-control policies of the 1970s would not be reenacted, they sold inventory to the market and made money from the 85 percent price hike. The marketplace worked efficiently and both producers and consumers were thus better off than they had been when government encumbered the forces of supply and demand in the 1970s. 25
  26. 26. MGW 2010 High Oil Good Grove/Petit Lab A2 shocks – storage solves Oil storage prevents crisis with unexpected movements in supply or demand Prepared Statement of W. David Montgomery Vice President, Charles River Associates Inc., Before the Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, 4/23, 2002 Now to the good news. Oil can be stored, and oil inventories provide an extremely valuable and effective counterbalance to unexpected movements in supply or demand. Sometimes inventory building can put upward pressure on prices, as we have seen recently, with fears of future price increases stimulating precautionary accumulation of inventories. This building of inventories will buffer any future disruption of supplies. In addition, another offset to future supply disruptions is now available: the reductions in output by OPEC (and countries like Norway and Russia) have created substantial excess capacity in the world that can compensate for lost supplies from Venezuela or Iraq. Storage and surge capacity prevent oil disruptions James M. Kendell, National Energy Information Center, 7/22, 1998, http://www.eia.doe.gov/oiaf/archive/issues98/oimport.html By 1990 the United States and other governments had created emergency stockpiles of oil as a buffer against disruption. The invasion of Kuwait showed that the United States and other governments were willing to use their stockpiles. A noncommercial measure, “Days of Net Petroleum Imports in the Strategic Petroleum Reserve,” is published in the Annual Energy Review. It shows that the U.S. Strategic Petroleum Reserve (SPR) peaked at 115 days of supply in 1985 and has now declined to 63 days. Assuming that the SPR does not expand or contract, coverage will decline to 35 days in 2020 as consumption grows. Combining noncommercial and commercial stocks provides a somewhat broader measure of the ability of inventories to respond to supply disruptions. Since 1985, available commercial stocks in the Organization for Economic Cooperation and Development (OECD) countries have fluctuated between 25 and 30 days of supply. Assuming that commercial pressures keep stockpiles from expanding, while consumption continues to grow, the supply would slip to 20 days in 2020.8 Besides stockpiles, surge capacity or excess world production capacity is another source of supply. Historically, excess capacity has responded primarily to prices, building up during periods of high prices and declining during periods of low prices. A buildup occurs during a high-price period such as the early 1980s, as consumers conserve and producers rush to find more oil and cash in on high prices. If oil prices remain at their current moderate levels through 2020, excess capacity can be expected to decline from 3.4 to 2.4 million barrels per day in 2013, before rising to 3.2 million barrels per day in 20209 (Figure 4). The US maintains a robust SPR to hedge against volatility Joe Barnes, research fellow at the Baker Institute for Public Police at Rice, Amy Jaffe, Fellow for Energy Studies at the Baker Institute, and. Edward L. Morse, Executive Adviser at Hess Energy Trading Company and was Deputy Assistant Secretary of State for International Energy Policy in 1979–81, Winter 2003/2004, originally printed in National Interest, http://www.saudi-us-relations.org/newsletter2004/saudi-relations-interest-01-06.html No one is satisfied with the current energy policy status quo; but few seem willing to make the hard decisions and uncomfortable compromises necessary to do anything about it. And no party has sole ownership of the status quo. It represents a continuation of the policy of successive administrations in Washington over the past quarter century in encouraging diversity of global oil production, cooperation with major oil producers -- especially Saudi Arabia -- to ensure stable markets, research in alternative fuels as a hedge against long-term price increases and reliance on a robust strategic petroleum reserve for use in cases of extreme market volatility. 26

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